Finance & Business

Step-by-Step Process to Calculate Your Retirement Corpus

Thinking about your retirement stage is an important part of financial planning. Imagine a point in your life when you will not have a consistent stream of income from your employment. It may sound scary, but indeed, it is a reality. You will need to establish a source of income for yourself. Many people consider retirement planning to be a difficult process and frequently use it as an excuse to avoid saving for it. Nonetheless, it is important to do so. To do so, carefully evaluate the money required to sustain your lifestyle and then invest accordingly.

Here are the measures you can take to estimate your retirement corpus:

  1. Make a list of the current monthly expenses and write them down: Calculate to determine your projected costs that are recurrent and will be incurred during the period of retirement as well. Put down a comprehensive list of all of your monthly expenses, including those for groceries, utility bills, and home maintenance, because it is likely that these will continue to be a part of your life when you retire.
  1. Determine your anticipated income: The next step is to add up all of your earnings from the different sources. Pensions, Employee Pension Scheme (EPS) pensions, income from insurance plans or pension policies, and any property revenues that are intended to continue beyond retirement will all be included in this group for the purpose of retirement planning.
  1. Determine the required amount of net income: Take the total income from Step 2 and subtract it from the total costs of Step 1. For instance, if your monthly expenses amount to 60,000 rupees and your expected income is 26,000 rupees, you will need an additional 34,000 rupees to pay the expenses associated with your retirement.
  1. Determine the value of the extra income that will be required in the future: It may appear that the extra funds that are necessary are not very significant at the moment; nevertheless, as time goes on, they will become more significant due to the rise in the rate of inflation. In spite of the fact that the current rate of inflation is lower than three percent, financial experts recommend that when calculating, the long-term average of six percent should be used. Even at this slow pace, a monthly expense of one lakh rupees will climb to five and a half lakh rupees in thirty years and thirty-two and a half lakh rupees in sixty years.
  1. Calculate the retirement corpus required at 60: Determining the required retirement corpus at the age of 60 is challenging since it depends on factors such as life expectancy, asset allocation, and predicted returns from various asset types. Ideally, planning should continue until the age of 90. This is where using the retirement calculator available on most of the insurance websites selling pension plans will come in handy. The traditional strategy of quickly moving from equities to debt after retirement is no longer recommended. Maintaining a large exposure to growth assets, such as equities, is critical given that retirement lasts about 25-30 years after leaving employment at the age of 60. A portion of the retirement savings will be used 10-15 years after retirement, making long-term debt investments optional. According to professional opinion, the proper equity allocation after retirement is determined by applying the formula of 100 minus your age. This implies keeping a 40% exposure to equities at age 60 and at least a 30% allocation by age 70. Another important consideration is the return assumption for asset classes such as stock and debt. If someone is 60 and requires an additional income of Rs 1 lakh per month, he will require a retirement fund of Rs 2.57 crore to last 90 years. To determine your actual demand, multiply the value from Step 4. Don’t be alarmed if you notice an extremely large figure here. Younger folks will face larger requirements due to inflation compounding their expenses.
  1. Calculate the amount you have accumulated: Include any accumulated funds set aside for retirement through various instruments such as EPF, PPF, NPS, or other insurance plans. Combining these sources will provide a summary of your present retirement fund.
  1. Calculate the amount your present retirement fund will increase to. Proceed to the next stage by determining how much the existing corpus will grow. Compounding ensures that younger people experience faster growth. The ultimate value will depend on the asset allocation method used. If your retirement savings are mostly invested in equity-oriented instruments such as equities funds, stocks, hybrid funds, or NPS with strong equity exposure, the gain will be more significant. Multiply by the actual value obtained in Step 6. Keep in mind that this is based on the asset allocation guideline of 100 minus your age. If your asset allocation is much lower, you should calculate it independently.

For each investment, use the following formula: Future value at 60 = Current corpus * (1 + expected return) ^ number of remaining years. Calculate the additional corpus needed: After finding the entire retirement corpus necessary at 60 and projecting how much your existing corpus will grow by that age, calculating the additional corpus required is simple. Simply subtract the value from Step 7 from the value from Step 5.

  1. Calculate how much has to be saved each month: Young people should not be too anxious if the calculation yields a significant requirement. With enough time for saving and capital growth, accumulating the necessary funds is possible. According to the chart, a person between the ages of 30 and 35 can accumulate a corpus of Rs 1 crore by the age of 60. They benefit from the favourable effect of compounding. The figures on the chart are based on generating Rs 1 crore; change by multiplying by the value you acquired in Step 8 (multiply by 2 if it is Rs 2 crore, by 5 if it is Rs 5 crore, and so on).
  1. Add up continuing investments to determine how much more to invest. Finally, add up all of your current regular retirement investments, such as EPF payments, mutual fund SIPs, ULIP charges, and insurance premiums. Subtract this total from the value obtained in Step 9 to calculate the additional monthly payment. It’s vital to note that the amount in Step 9 is derived using an asset allocation of 100 minus your age. Individuals who invest solely in debt products may face higher investment requirements. Adjust your plan to reflect your preferred asset allocation approach.

Finding a balance between reasonable return expectations and an ideal standard of living is one of the most difficult aspects of building a comprehensive retirement strategy. Build a portfolio that is adaptable and can be adjusted on a regular basis to reflect changing market conditions and retirement plans.

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